001

Simplified Examination to Maximize Profit

Copyright 2013 by Richard L. Weinberger

No part of this book may be reproduced, redistributed, taught, stored in retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise, without the prior written permission of the publisher.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

Printed in the United States of AmericaFirst printing, 2013ISBN 978-0-9896050-1-4

Published by Association of Accredited Small Business Consultants, Inc.901 S. Mopac ExpresswayBarton Oaks Plaza One, Suite 300Austin, TX 78746

Ordering Information:Please visit our website at www.aasbc.com or call (888) 715-2435.

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INTRODUCTION 6 Summary Introduction 11

MODULE 01 - SMALL BUSINESS TODAY 121.0 The Dream Lost 121.1 Small Business Today 131.2 Small Business and Entrepreneurial Business 141.3 Studying Small Business 151.4 Success and Small Business 16 Summary Small Business Today 18

MODULE 02 - GENERAL FINANCIAL STATEMENT REVIEW 192.1 General Review - Income Statement 202.1.1 Adjusting for Abnormal Expenses 202.1.2 Common Size Income Statements 222.1.3 Income Statement Inquiry 242.1.4 Cash to Accrual Basis of Accounting 252.2 General Review - Balance Sheet 262.2.1 Common Size Balance Sheet 272.3 Review - Statement of Cash Flows 28 Summary General Financial Statement Review 35 Appendix General Financial Statement Review Checklist 36

MODULE 03 - REVENUE AND EXPENSE REVIEW 373.1 Revenue Review 373.2 Revenue Analysis by Category 383.3 Gross Profit Margin Analysis 423.4 Internal Transaction Controls 473.5 Revenue and Gross Profit Summary 473.6 Expense Review 483.7 Revenue and Expense Narrative Variance Report 53 Summary Revenue and Expense Review 55 Appendix Revenue and Expense Review Checklist 57

MODULE 04 - ASSET AND LIABILITY REVIEW 614.1 Asset Review 614.2 Liability Review 694.3 Unrecorded and Contingent Liabilities 744.4 Restructuring Long-Term Debt 76 Summary Asset and Liability Review 76 Appendix Asset and Liability Review Checklist 78

MODULE 05 - RATIO ANALYSIS 825.1 Current Ratio 835.2 Acid-Test Ratio or Quick Ratio 835.3 Working Capital 845.4 Accounts Receivable Turnover Ratio 845.5 Days Sales Uncollected 855.6 Inventory Turnover 86

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5.7 Days Sales in Inventory 875.8 Debt to Equity Ratio 885.9 Times Interest Earned 895.10 Profit Margin Ratio 895.11 Total Asset Turnover 90 Summary Ratio Analysis 91 Appendix Ratio Analysis Checklist 92

MODULE 06 - SWOT ANALYSIS 936.1 SWOT Categories 936.1.1 Strengths 946.1.2 Weaknesses 956.1.3 Market Opportunities 976.1.4 Threats 986.2 SWOT Analysis - Now What? 996.2.1 Strengths 996.2.2 Weaknesses 1006.2.3 Market Opportunities 1006.2.4 Threats 1006.3 SWOT Template 1016.4 Sample SWOT Analysis 102 Summary SWOT Analysis 103 Appendix SWOT Analysis Checklist 105

MODULE 07 - OPERATIONAL MANAGEMENT 1067.1 Effective vs. Efficient Operations 1067.2 Supply Chain Management 1087.2.1 Forecasting, Pricing, Inventory Decisions, and Scheduling 1097.2.2 Transportation 1117.2.3 Financing 1127.2.4 Customer Requests 1127.3 Managing for Change 1137.4 Outsourcing 1157.5 Human Resources 1177.5.1 Hiring and Interviewing 1187.5.2 Employee Handbook 1187.5.3 Payroll and Related Functions 1187.5.4 New-Hire Orientation and Training 119 Summary Operational Management 120 Appendix Operational Management Checklist 121

MODULE 08 - STRATEGIC PLANNING 1248.1 How, What, Where 1248.2 Strategic Approaches 1258.3 The Plan Itself 1268.4 An Existing Plan 1288.5 Strategic Alliances 1298.6 Vertical Integration 1298.7 Business Plan 130

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8.8 Plan Execution 132 Summary Strategic Planning 133 Appendix Strategic Planning Checklist 135

MODULE 09 - BUDGETS AND FORECASTS 1379.1 Budgets versus Forecasts 1379.2 The Budget Process 1389.3 Static and Rolling Budgets 1409.4 Fixed and Flexible Budgets 1419.5 Budget Variance Report 1439.6 Capital Expenditures and Cash Budgets 1449.6.1 Capital Expenditures Budget 1449.6.2 Cash Budget or Cash Flow Budget 145 Summary Budgets and Forecasts 149 Appendix Budgets and Forecasts Checklist 150

MODULE 10 - INTERNAL CONTROLS 15110.1 Cash 15210.2 Receivables 15410.3 Payables 15510.4 Inventory 15610.5 Miscellaneous General Control Measures 157 Summary Internal Controls 158 Appendix Internal Controls Checklist 160

MODULE 11 - MARKETING & BRANDING 16211.1 Marketing Strategy and Objectives 16411.2 Market Analysis 16511.2.1 Your Own Research First 16511.2.2 Interviewing Your Client 16611.2.3 Conducting Market Research 16711.3 The Marketing Advantage 17011.4 Branding 17111.5 Marketing Ideas 17211.6 The Marketing Budget 173 Summary Marketing 174 Appendix Marketing Checklist 178

MODULE 12 - BUSINESS ORGANIZATIONS 18312.1 Sole Proprietorship 18312.2 General Partnership 18412.3 Limited Partnership 18612.4 C Corporation 18612.5 S Corporation 18812.6 Limited Liability Company 189 Summary Business Organizations 190 Appendix Business Organization Checklist 192

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MODULE 13 - FINANCING 19413.1 Debt versus Equity Financing 19413.2 Sources of Debt Financing 19513.2.1 Friends and Family 19513.2.2 Commercial Banks 19613.2.3 Financing with Receivables 19713.2.4 Vendor Financing 19813.2.5 Leasing 19813.2.6 Credit Cards 19913.2.7 Refinanced Homes and Second Mortgages 20013.3 Angel Investors 20013.4 Venture Capital 20013.5 Initial Public Offering 20113.6 Federally Sponsored Programs 20113.7 Merger 201 Summary Financing 202 Appendix Financing Checklist 203

MODULE 14 - RISK ASSESSMENT AND FRAUD DETERRENCE 20514.1 The Fraud Triangle 20714.1.1 Opportunity 20814.1.2 Motive or Pressure 20914.1.3 Rationalization 21014.2 The Many Faces of Fraud 21114.3 Some Common Examples of Fraud 21314.4 Stop it in the First Place - Prevention! 21414.5 Risk Assessment Scoreboard 216 Summary Risk Assessment and Fraud Deterrence 218 Appendix Risk Assessment and Fraud Deterrence Checklist 219

MODULE 15 - MARKETING YOUR CONSULTING PRACTICE 22015.1 Maslows Hierarchy of Needs 22015.2 Value-Added Service 22215.3 Billing for Services 22415.4 Relationship with Client 22515.5 Building your Reputation 22615.6 The Consulting Report 23115.6.1 Written Report Format 23215.7 Practice Makes Perfect 23315.8 Consulting Potential 233 Summary Marketing Your Consulting Practice 234 Appendix Marketing Your Consulting Practice Checklist 236

GLOSSARY 238INDEX 245FOOTNOTES 253

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Financing activities are related to external financing transactions of the company. Cash inflows occur when the company borrows money or investments are made into the company from owners. Cash outflows take place when loans are repaid or monies distributed to owners.

OKso what is included in a statement of cash flows? All transactions affecting cash from operating, investing, and/or financing activities. not difficult, just take one step at a time. Lets review the illustration below and everything should fall into place.

Again, the statement of cash flows has three major sections (these are illustrated above inbold lettering):

Cash flows fromoperating activities

Cash flows from investing activities

Cash flows from financing activities

Interest paid is not a component of financing activities as interest is a component of operating net income.

* Not a real company. Illustration purposes only. Does not relate to previous illustrated income statement.

TIP 2.9

Cash flows from operating activities(1) Net operating income(2) Adjustment to reconcile net income to net cash provided by operating activities(3) Increase in accounts receivable(4) Increase in accounts payable(5) Depreciation expense

(6) Net cash provided by operating activitiesCash flows provided by operating activities(7) Cash received from sale of equipment(8) Cash paid for equipment(9) Net cash used by investing activitiesCash flows from financing activities(10) Increase in note payable(11) Payment of cash dividend(12) Net cash provided by financing activities(13) Net increases in cash(14) Cash balance at prior year-end(15) Cash balance at current year-end

(8,000)1,5002,000

800(9,600)

35,000(5,000)

50,000

(4,500)45,500

(8,800)

30,00066,7004,500

71,200

STATEMENT OF CASH FLOWS

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3.2 REVENUE ANALYSIS BY CATEGORYSeldom does a business only have one product or one service that generates revenue. Not all products or services, obviously, bring in the same amount of revenue or profit. Since the small business owner is spending most of his time bringing in revenue and managing the daily operations of the business, many times there is no thoughtful analysis of each separate line of revenue, what profit it is producing, and what effort is necessary to produce that revenue.

An analysis should be made by product line, department, or service accounting for the various sources of revenue. This is important because, as you will see in the next section, not all sources of revenue produce the same amount of gross profit. Financial statements normally will not be broken down in detail by product line.

Keep in mind that you might find some resistance from your client in trying to obtain the revenue detail. If the detail is not readily available (many small businesses for simplicity put all revenue into one category on their financial statements), this can be a rather time-consuming process in reconstructing the various sources of revenue for each month during the accounting year or even a year-to-year analysis. If revenue detail is not available, it increases the difficulty in trying to make recommendations for revenue improvement.

The analysis and review process follows the same pattern as the analysis of the income statement and balance sheet. Revenue figures should be entered into Excel or another spreadsheet application program using both dollars and percentages as illustrated below.

* Not a real company. Illustration purposes only.

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If the revenues are not detailed by product line or service on the Income Statement, you must ask your client for this detail or work with your client in constructing this detail as much as possible.

ASK YOUR CLIENT

Explain to your client how important it is to have a detailed breakdown of the revenue and advise him to start keeping this detail and supplying it to whoever keeps his books and prepares the companys financial statements.

ADVICE TO CLIENT

Product Line A

Product Line B

Product Line C

Product Line D

Total Revenue

Product Line A

Product Line B

Product Line C

Product Line D

Total Revenue

50,00060,00010,00080,000

200,000

25.00%30.00%

5.00%40.00%

100.00%

95,000110,000

40,000155,000400,000

23.75%27.50%10.00%38.75%

100.00%

125,000125,000

90,000210,000550,000

22.73%22.73%16.36%38.18%

100.00%

135,000160,000185,000320,000800,000

16.88%20.00%23.13%40.00%

100.00%

hISTORICAL REVENUE BY CATEGORY

Year ended12/31/08

Year ended12/31/09

Year ended12/31/10

Year ended12/31/11

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Quite possibly, your client has never actually seen a breakdown of the business by product, service line, or department. This detail is the beginning of your revenue analysis. In the example above, you will note that although the revenue has increased for all product lines, the percent of revenue per product line as compared to the total revenue has been:

Decreasing steadily for product line A and B,

Increasing significantly for product line C, and

Holding steady for product line D

This is a perfect example of how converting dollars into percentages gives you an entirely different perspective as to which product lines are growing and which product lines are shrinking. In this example if the current trends do not change, the future of the business lies more with product lines C and D rather than with product lines A and B.

Revenue analysis does not stop with a simple preparation of trending historical revenue numbers in the spreadsheet. This might be an excellent time to go back and review section 1.4 related to success in small business (operate a business as efficiently as possible and beat the competition by being better and different). Keep these thoughts in mind as you begin your analysis by product, service line, or department. Some sample questions and recommendations (based on your clients answers) might be:

SAMPLE QUESTIONS AND POSSIBLE RECOMMENDATIONS

Is all revenue recognized in the correct period?

How is your pricing determined?

What are your sales terms?

1

2

POSSIBLE RECOMMENDATION: You must recognize revenue in the correct period. Holding the books open past the end of the month or quarter distorts the true revenue and profit or loss of the business. Lets figure out why youre not recognizing the revenue in the correct period and what can be done to correct and improve the situation that causes you to shift revenue from one period to another.

POSSIBLE RECOMMENDATION:You should determine the pricing of your products or services based on the amount of your anticipated gross profit. Determine the costs that you will have in each product or service and price accordingly to obtain the desired gross profit. You must also be competitive in your pricing based on market factors, economic conditions, quality of products and services, and strategic goals of the company.

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POSSIBLE RECOMMENDATION: Depending on your products or services, think about offering: discounts for early payment, delayed payment for credit worthy customers, COD (collect on delivery) for hard-to-collect customers, down payments, refundable retainers, consignment sales, take home on approval, or interest on late payments.

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MODULE 05RATIO ANALYSIS

What in the world is ratio analysis? You may or may not be familiar with the term. No need to worry our ASBC course will walk you through the process as ratio analysis can be an effective part of a financial review. Ratios can highlight trends and provide assistance in identifying and quantifying some of a companys strengths and weaknesses, both on an absolute basis and even relative to other companies in the same industry.

There can be a ratio for practically anything you want to review; however, we will only cover those ratios that will be most important and most helpful in your consulting engagement to develop trends and review the relative financial strength in certain areas for your client. This module will cover the following ratios:

Current Ratio

Acid-Test Ratio or Quick Ratio

Working Capital

Accounts Receivable Turnover Ratio

Days Sales Uncollected

Inventory Turnover Ratio

Days Sales in Inventory

Debt to Equity Ratio

Times Interest Earned Ratio

Profit Margin Ratio

Total Asset Turnover

There are no precise ratio measurements that can tell you unequivocally that the ratio is either good or bad for your particular client. There are generalized statements that can be made for each of the various ratios, but the ratio must be compared to previous years of the same company, compared to other companies, or compared to industry norms. The easiest, fastest way to analyze any ratio is to understand its trend. Is it increasing or decreasing? Is it getting better or worse? Set up a simple spreadsheet so you can see the trend of each ratio as illustrated below (detailed explanations will follow).

RATIO ANALYSIS

Current Ratio

Acid-Test or Quick Ratio

Working Capital

Accounts Receivable Turnover Ratio

Days Sales Uncollected

Inventory Turnover Ratio

Days Sales in Inventory

Debt to Equity Ratio

Times interest Earned Ratio

Profit Margin Ratio

Total Asset Turnover

YEAR ENDED12/31/08

YEAR ENDED12/31/09

YEAR ENDED12/31/10

YEAR ENDED12/31/11

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MODULE 06SWOT ANALYSIS

Now that the financial review has been completed, the next step in understanding your clients business is to prepare a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis highlights all factors that a company should consider when planning for the future. So you can obtain a comprehensive overview of your clients company, you want to understand the SWOT factors. Chances are your client has never performed a SWOT analysis or, perhaps, has never heard of a SWOT analysis. Without a critical self analysis of ones company, how does a small business owner plan for the future?

A prevalent misconception with small businesses is thinking that whatever is being done right and profitable today should continue without change into the future. This is where most small business analysis stops and fails. What was profitable five years ago, what was profitable one year ago, or what is even profitable today does not mean that the same products or services will be profitable in the future. This is one of the reasons that approximately 50% of new businesses are out of business five years after their inception. Business is not static; it does not remain the same. Think about how technological advancements have changed businesses. Think about how economic cycles have changed the business landscape. A business that does not understand the need for change and self-reflection has a lesser opportunity of succeeding than those that understand the need for analysis, responsiveness, and change.

It is great to understand what made a business profitable in the past, but it is equally important to understand what failures have taken place, what has hurt profitability, and how those factors could be improved. A sign of business intelligence is to be able to understand a companys strengths and opportunities as well as understanding its weaknesses and threats. This is what a SWOT analysis accomplishes.

With the proper completion of a SWOT analysis, you will be able to identify important elements in a business and discuss with your clients changes for the future strategy of their businesses. A business cannot rest on its past successes. Yes, a companys reputation, customer loyalty, superior products or services offered, and other factors that proved successful in the past will certainly benefit a company in the future; nevertheless, past performance is not a guarantee of future success. Equate this to someone investing in your clients company. There is no question that a investor is interested in past earnings, but they are really investing to share in the potential future earnings as a part owner. An investor has no claim on past earnings. So, the past can be an indicator and, to a certain extent, a predictor of future performance; however, future performance and profitability lies in the foundation of a company capitalizing on its strengths and opportunities and improving upon its weaknesses and reducing potential threats.

6.1 SWOT CATEGORIESLets review a SWOT analysis and identify some of the individual characteristics for each of thefour categories.

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6.1.1 STRENGThSThe strengths of a company are those internal resources, processes, or procedures a company does well. These strengths enhance its competitiveness in the market. Examples might be:

Specialized skills or expertise in certain areas that make the company highly competitive, relative to other companies in a similar market or industry. These might involve:

(1) Having a low-cost operation (2) Advanced technological abilities (3) High-quality products or specialized services (4) Research, development, and introduction of new and innovative products

and/or services (5) Fine-tuned supply chain management functions (discussed later in section 6.4) (6) Being one of the first to the market companies with new products and services (7) Expertise with Internet, websites, and e-commerce

Assets, equipment, and facilities that enable the company to have a competitive edge such as: (1) Technological advanced equipment (2) Location of real estate (3) Modern warehouse and distribution facilities (4) Capacity to grow

human capital: (1) Depth of management (2) Experienced, long-term employees (3) Highly competent personnel

Intangible Assets: (1) Marketing and selling superiority (2) Broad base of customers (loyal and long-term) (3) Broad base of suppliers (quality service and price competitive) (4) Recession proof business (as much as possible) (5) Non-seasonal business (6) Branded name (7) Superior products and wider variety of products and services than competition

Internal and organizational assets: (1) Financial strength and resources (2) Provides excellent customer service (3) Proprietary assets (4) Strategic alliances with other businesses

As you can see, the list of strengths can be endless or the list can be very short. It is the combination and an accumulation of all the various strengths of a company that give it a competitive advantage and strength in the marketplace. It is the synergistic effect of all of a companys strengths that make a company valuable. The overall strength of a company is not dependent upon one person, one product

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APPENDIX - Swot Analysis Checklist

Prepare SWOT Analysis identifying strengths: Specialized skills Assets, equipment, and facilities enabling company to have competitive edge Human capital Intangible assets Internal and organizational assets (See Section 6.1.1 and 6.2.1)Prepare SWOT Analysis identifying weaknesses: Lack of expertise Lack of employee talent, loyalty, and longevity Inferior and/or obsolete assets, equipment, real estate Poor location Ineffective marketing No clear strategic direction Weak financial position and resources High costs, low profit No product or service innovations Non-responsive customer service and follow-up Narrow product or service line Small customer base compared to competition Weak brand image Small group of suppliers Losing market share Lack of strong management (See Section 6.1.2 and 6.2.2)Prepare SWOT Analysis identifying market opportunities: Expanding geographically or globally with existing products or services Purchase of a competitor Purchase of an unrelated company to diversify product or service offerings Developing strategic alliances with other companies Hiring talented personnel to enter new markets and/or offer new products or services Discover underserved markets and satisfy needs of that market (See Section 6.1.3 and 6.2.3)Prepare SWOT Analysis identifying potential threats: Competition with cheaper or better technologies New or improved products or services

introduced by competitors Less expensive foreign imports New taxes or business regulations Increase in interest rates and operating costs Shift in customer or supplier base Larger companies with more financial

resources duplicating products or services Tight credit market due to national and

worldwide economy Bargaining power of major customers reducing profit (See Section 6.1.4 and 6.2.4)SWOT template (See Section 6.3)

Process CommentsDate

Completed or N/A

Needs AdditionalAnalysis ()

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MODULE 08STRATEGIC PLANNING

If a business is to grow and prosper, the owner must know where the business is going. There must be direction with goals to be achieved. Without a plan, a business simply operates from day-to-day without any clear path to its future. Perhaps, it succeeds in spite of the fact that there are no plans; perhaps, it flounders. It is similar to starting a trip without a roadmap and without any knowledge of where youre headed. Among many factors leading to the success of a business is a strategic plan. It should define what the business is trying to achieve and how it will achieve those objectives. Put very simply, a strategy is a plana blueprintas to how the owner or management intends to operate and grow the business.

8.1 hOW, WhAT, WhEREWhen developing a strategic plan, many questions need to be answered. The basic questions always start with the word how, what, or where.

How do we do this? -How is that to be done?

How do we develop loyal customers?

How do we retain employees?

How do we actually conduct our operations?

How is pricing determined?

Where do we find suppliers?

Where should we locate?

Where do we advertise?

What are the needs of our customers?

What is the best way to market our services or product?

What is the best way to finance the business?

What type of insurance do we need?

The list of how, what, and where questions can go on for pages. You can imagine everything that could be answered with these questions, ranging from sales to service, production and financing, to hiring employees. The answers to these basic questions can be a summation of (1) how is the company going to operate, (2) how is the company going to grow, and (3) how is the company going to obtain a competitive advantage over others in the same business and in the same marketplace? Remember, the goal of the business is not to simply meet the competition although this is a philosophy of many small business owners. The goal should be: to beat the competition and obtain that competitive edge necessary to be profitable and successful.

Pick a company you are familiar with and consider if that company operates with a plan or not. Most small businesses operate on a whim and a prayer hoping from one day to the next and from one year to the next that they will be profitable and grow. Sometimes it happens; sometimes it doesnt. Rather

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than a company opening its doors and hoping for the best, it should have goals and objectives, which are clearly stated and understood by all employees. Yes, all employees because everyone involved in the business from the owner or manager down to the lowest level employee must understand the business goals, where it is headed, and how it intends to get there. When a business grows and prospers, everyone involved with the business enjoys a similar prosperity. This is why it is vitally important for all employees to understand the goals of the business.

8.2 STRATEGIC APPROAChESThere are many approaches to develop a competitive business strategy. These approaches must be a match for the company based on the companys internal strengths and weaknesses (back to the importance of a SWOT analysis!). Example strategies might be:

Striving to be a low-cost provider (least expensive product or service)

Having a higher quality service or product

Wider product selection or multitude of related services (diversification)

Value added services

Technological superiority

Reputation for exceptionally good value for ones money

Focusing on a narrow market niche

Developing marketplace expertise

First into a market (taking advantage of being the first), last into the market (letting the bugs be worked out by others), or somewhere in between (after doing more research into the product, service, and market)

Introduction of a better product or service based on changes in the marketplace or consumer demand

From the strategies listed, it is easy to see that there can be a wide variety of strategies that companies within the same industry can take. Each company can and will have a different strategy. While some companies might want to be the first mover into a market to gain a competitive advantage, other companies are content to be late arrivals into the marketplace gaining knowledge from what other companies have done, both good and bad. Of course, a late arrival into the marketplace might find that the market is already diminishing, but this is a strategy for many businesses.

Diversification is another example. Much thought has to be given if a company decides to diversify into an unrelated business in which it has no experience. There might be potential for growth, but where does the talent come from to run the new segment of the business? Is key talent brought in from outside the company to properly develop new strategic options or is key talent someone within the company who is groomed for the new position? An advantage of diversification is that risk is spread across different areas of the business rather than having all the risk associated with only one segment.

ASK YOUR CLIENT

Start your discussion in this area by asking your client to describe to you the companys competitive business strategy. If your client has one, thats great and that gives you the opportunity to learn about its strategy and how it might be improved. If there is no strategy, this really gives you the opportunity to start working with your client to develop one. Either way, you can assist in establishing the future course of the business.

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through vendors. They would then eventually be selling products they manufactured themselves. They expanded vertically by adding another process to the companys activitiesmanufacturing and selling, rather than only selling.

Vertical integration does not have to be a complete integration taking over 100% of another process. It could also be a partial integration depending on what activity is undertaken. Obviously, before a company can undertake vertical integration, it must decide what skills and capacity the company has and what skills and capacity must be added so desired results can be achieved. Before undertaking vertical integration, a company must have the internal resources available for the type of vertical integration it desires to undertake. The company risks financial problems and loss of efficiency if not handled correctly. Taking resources away from one part of the company and investing those resources in other parts of the company might prove to be either beneficial or detrimental to the company. Pros and cons must be weighed to determine what is best.

8.7 BUSINESS PLANFrequently, a business plan and a strategic plan are used synonymously. They may be the same, but as previously stated, a strategic plan is very precise, defining in detail how a company will be run and how management intends to grow the company. A business plan has similar information but with less detail. It is usually prepared in the formation stages of the company, especially, if the founder of the business is trying to attract investors or obtain financing. A well-developed business plan is a work in progress and can (and should) be expanded into a more complex, strategic plan as the company begins to operate, evolve, and grow.

As with a strategic plan, there is not a single template that should be used in writing a business plan. The most important element in the preparation of a business plan is to make certain that important factors of the business are covered, and it has a professional appearance. It should contain the following:

Cover Page

Executive Summary

a. Short overview of the business

b. Objectives

c. Mission statement

Table of Contents

Business Profile

a. Description of the business (product and/or services offered)

b. History and form of organization

c. Organizational chart and individual manager resumes

d. Board of Directors or Board of Advisors (short resumes)

e. Core competencies

f. Opportunities and challenges

g. Marketing Plan

I

II

III

IV

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- Market research - Customers - Industry information - Pricing - Sales forecast - Marketing strategy - Marketing budget

h. Competitive Analysis - Major competitors - Long-term industry forecast

i. Operational plan - Personnel - Location - Legal environment and licenses (if applicable) - Inventory and suppliers (if applicable) - Credit policies - Professional assistance

Financial Information

a. Projected income statements and balance sheets for three years by quarter

b. Projected statement of cash flows for three years by quarter

c. Start-up expenses (if new)

d. Break even analysis

e. List of capital assets (date to be acquired and cost)

f. Loan applications (if applicable)

g. Debt servicing schedule

h. Insurance

Growth Plan

Supporting Documents

a. Marketing materials

b. Research studies

c. Industry articles

d. Loan applications

e. Licenses and permits

Although each business plan will contain the above elements, a business plan will also be individualized for the particular industry in which it operates. A manufacturing company might have presentations on their production processes, production levels, direct and indirect costs, capacity limitations, supply chain processes, or possible research into new products. Service businesses might have specific information on pricing, industry standards, control procedures, or subcontracting while retail businesses might discuss their company image, branding policies, pricing policies, inventory and control methods, and major promotional activities.

V

VI

VII

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following year making it more difficult for that particular department or division to achieve its goals in the subsequent budget year. If this atmosphere exists, there is a tendency for managers to spend all budgeted funds even though expenditures might not be completely necessary with the mind set that more money will be allocated the following year making it easier to achieve the next years targeted goals (and, maybe, even a bonus for those involved). When the companys performance takes a back seat to individual performance, efficiencies are usually lost along the way.

At times, it is difficult not to pad budgets, but they should reflect realistic minimum amounts of revenue to be expected and expenses to be incurred. Since it is common that sales might not be achieved as expected orsome out of the ordinary expenses incurred, a realistic budget should take into consideration various factors that could change during the normal course of business. This is different than those occurrences that are completely out of the ordinary, unusual, and out of managements control.

9.3 STATIC AND ROLLING BUDGETSA budget can either be static or rolling. A static budget does not change. In other words, the budget might be for a 12-month period of time (or any time period that management selects), and that budget remains the same until the next years budget is prepared. This is the most common type of budget and easiest to prepare. The budget is prepared prior to the accounting period commencing and is used during the entire budget period until a new budget is prepared for the subsequent accounting period.

Another type of budget that many companies find extremely useful is the rolling budget. In contrast to the static budget, the rolling budget splits the annual budget into four quarters, which produces a budget that includes the most current upcoming four quarters. This is called a rolling budget because as soon as one quarter ends, the budget rolls in another quarter. Rather than getting to the last quarter of the year with no future budget to work from until the next years budget is prepared, a rolling budget always gives a company at least four quarterly budgets (goals) to achieve. A rolling budget could, of course, be for any period of time a company chooses.

There are several advantages to using a rolling budget. It forces management to constantly review not only performance but update goals that the company is trying to achieve. Rather than preparing a static budget for a 12-month or longer period of time and then only reviewing variances based on actual performance, the rolling budget keeps management abreast of current factors that influence future business decisions, such as economic conditions, competition, changes in product or service lines, or other variables that affect performance. The constant review of goals to be achieved and evaluation of performance keeps owners and managers more involved in daily decision-making processes. It makes the process more meaningful and realistic by making decisions based on current conditions contrasted with making decisions based on budgeted numbers that might have become outdated due to circumstances not known or predicted at the time the original static budget was prepared. Rather than

Solve this budgeting problem by giving a monetary incentive to exceed expected results, while still operating efficiently as or better than expected.

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11.2.3 CONDUCTING MARKET RESEARCHSome small businesses think they cannot afford any market research. The actual fact is that they cannot afford NOT to do any market research. A small business must make the most of allocated marketing dollars. An efficient use of some of those dollars must be for market research and analysis. Market research does not have to be elaborate or expensive nor does a market research firm have to be hired. Small businesses can conduct their own market research. One way you can add value for your clients is to explain how this can be done on their own. Below are some options for small businesses to conduct their own market research:

Send out surveys to existing and potential customers asking what they think about new products and services.

Seek out suggestions from customers and clients.

Test the water with a small amount of advertising to judge interest in a new product or service and measure results.

Have in-business questionnaires.

Review monthly activity for business trends.

Estimate how big the market is and research whether it is growing or shrinking.

Measure the market against the companys objectives.

Research what the competition is doing.

Review pricing relative to competition and value.

Find out if any professional studies have been completed and published.

Interview prospective customers about their needs.

Analyze who the companys customer really is.

Establish an advisory board to get a fresh set of eyes.

If a marketing agency is being used, obtain a progress and results report.

TIP 11.3

Review with your client, the companys current marketing programanything that is done to reach out to customers. Strongly encourage your client to think out loud when describing what the company does to market and why. Do not make judgments or observations about your clients choices, but listen, ask questions, take noteseven bring a digital recorder so you can recall details later on.

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A competitive advantage is established when the company offers superior customer value to satisfy a customers needs. It is also essential for a company to know its competition and its competitors products or services as well as its own. Competition is broader than just a direct competitor. Take the airline industry as an example. Airlines compete with each other, but airlines also compete with cars, trains, and buses for the same dollars and to provide the same solution to a customer. A marketing strategy has to appeal both to direct and indirect customers. If needs are satisfied and value established, indirect customers can become direct customers.

11.4 BRANDING What is it that makes a product or service readily recognizable? Why is it that when we see something, we immediately associate it with a particular company? It is branding. Branding clearly identifies a product or service. It is a recurring theme, symbol, slogan, or logo that someone sees all the time on products and in print ads, websites, TV promotions, company shirts, and other media forms to keep the companys name and products in the public eye. Apple Computer has its Apple symbol. Southwest Airlines planes are painted the same. Coca-Cola, Amazon, FedEx, Target, and Nike all have their own brand identity, as well.

Branding allows a company to stand out from the crowd. It differentiates one company from another. Constant and repetitive communication to customers brands a companys image in the marketplace. It is branding that ties the company to the customer or client. When branding is on target and successful:

Quality and value become associated with the branded products and services.

Buyers immediately relate a product or service to a particular company.

Credibility is instilled for the seller with the buyer.

Emotional attachments are developed.

Sales increase and loyalties are established.

ASK YOUR CLIENT

ASK YOUR CLIENT

(5) How can we think differently than our competition in our marketing strategy?(6) How can we let our customers know that we care about them?(7) How can we communicate the unique aspects of our brand, company, products, and services to our customers and clients?

What are you doing to brand your product or service?

Find one thing that is unique to your business, sets you apart from the competition, and, perhaps, is a bit clever that can be a branding tool for your business.

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MODULE 13FINANCING

Whether your client is already in an existing business or is thinking about starting a business, the question of financing is sure to come up. Most business owners do not have enough personal funds to finance an entire business and if they do, they usually do not want to invest all of their capital in the business. There are numerous ways to finance a small business with debt or equity. There are advantages and disadvantages to each. The reason for financingstart-up, working capital, or expansionmakes a difference as to which form of financing should be undertaken. Various options should be reviewed and considered carefully before making a final decision. Decisions made today related to financing have future impacts. Once made, some cannot easily be undone, so it is prudent to study all options to understand the current and future effects on both the business and the owner.

13.1 DEBT VERSUS EQUITY FINANCINGWhen a business borrows money, it is called debt financing. The business is creating a debt and that debt must be repaid with interest. The repayment terms and interest terms will be specified in the debt instrument. Interest is a business expense and tax deductible. In todays economy, business loans can be difficult to obtain and are based on the businesss ability to repay, collateral, and amount of capital invested by the owner. Since there is a direct relationship between risk and reward, lenders carefully scrutinize a business before making a loan. Given that there is a greater risk for a small business to succeed, a lender will normally charge a higher interest rate compared to interest rates charged to larger companies.

Equity capital or equity financing, in contrast to debt financing,is an investment from the owner or outside investors. This is sometimes referred to as risk capitalcapital that is at risk of being lost if the business is not successful. Investors lose money if the business fails, but if the business is successful, investors share in the rewards through the payment of dividends and an increase in the value on their investment. Equity capital does not have to be repaid, which is quite different from debt financing, and can be a source for small businesses. An owner must understand that at times to obtain capital and attract outside investors, a percentage ownership of the business must be given up. This amount depends on:

How much the investor is willing to invest?

How long the company has been in business?

How successful the company has been in the past?

What are the future prospects for the business?

An investor seeks to make a return on an investment (ROI). An owner seeks needed capital and in exchange gives up a percentage of ownership of the business. Some questions the owner might ask when contemplating obtaining equity capital from outside investors are:

What are the potential benefits for the business?

Will the outside capital allow the business to grow?

FINANCING